A recent decision in the NSW Supreme Court serves as a powerful reminder for businesses and lenders alike: strict compliance with the Corporations Act when executing loan documents is not optional. In Parramatta Co-Operative Housing Society v Yabbyland Pty Ltd [2026] NSWSC 656, a lender advanced $430,000 secured by a registered mortgage, only to have the loan agreement declared unenforceable because it was signed by only one director. While the lender ultimately recovered the principal through a restitution claim, the case highlights critical risks and legal principles for both borrowers and financiers.

The Background

The plaintiff (a co-operative housing society) lent $430,000 to the defendant company, secured by a registered mortgage over a property. The loan agreement was signed by only one of the company's two directors. The borrower made 35 monthly repayments before defaulting. The lender sought possession of the property and repayment of the outstanding balance.

The Key Legal Issues and Findings1. Loan Agreement Unenforceable Under s 127 of the Corporations Act

The Court held that the loan agreement was not binding on the company because it was not executed in accordance with section 127 of the Corporations Act 2001 (Cth). Section 127 requires a company with two directors to have the document signed by two directors (or a director and a company secretary).

• The lender knew there were two directors but assumed the second was a "director in name only."

• The lender did not conduct a company search.

• Because the lender had actual knowledge of the second director, it could not rely on the statutory assumptions in sections 128 and 129 that the document was properly executed.

Client Takeaway for Lenders: Never assume a director signing alone has authority. Always conduct a current company search and ensure documents are signed by the required number of directors or officers. For a proprietary company with two directors, that means two signatures.

2. No Ratification by Loan Repayments

The lender argued that the 35 monthly repayments "ratified" the otherwise unauthorised agreement. The Court rejected this:

• The repayments were set up automatically by the single director who signed the loan.

• The other director was unaware of the loan at the time.

• Once the other director discovered the loan, he complained to AFCA – an act inconsistent with ratification.

Client Takeaway for Borrowers: Passive acceptance of benefits (like loan funds) or automatic repayments arranged by another director may not amount to ratification if the board is unaware. However, this is a risky defence – clear, unequivocal action is needed to avoid adoption of a contract.

3. Restitution – Money Had and Received (The Lender’s Winning Claim)

Even though the loan agreement was unenforceable, the lender was entitled to recover the principal amount under restitution (money had and received). The borrower had conceded a prima facie right to restitution based on the lender's mistaken belief that the loan was binding.

The "Change of Position" Defence Failed

The borrower argued that it had spent $356,613 of the funds on property improvements in good faith, believing the money came from a director personally, not the lender. It claimed it would be inequitable to require repayment.

The Court rejected this defence because:

• There was no evidence of the property's value before and after the improvements.

• No evidence that the improvements (yabby ponds) did not add value to the property.

• The borrower could not prove it would be in a substantially worse position if required to repay.

Client Takeaway for Borrowers: A "change of position" defence to a restitution claim requires concrete evidence of detriment – speculation is not enough. You must prove that the funds were spent in good faith and that repayment would leave you materially worse off.

4. Does the Mortgage Secure the Restitution Debt? No.

The lender wanted a declaration that its registered mortgage also secured the restitution debt (so it could exercise a power of sale). The Court refused:

• The mortgage's "all moneys" clause was broad, but the Court found it was not within the objective contemplation of the parties that the mortgage would secure an involuntary liability arising from an unenforceable agreement.

• Unlike cases where a valid loan existed and a mere mistake occurred, here the loan was never enforceable from the start.

• The lender had knowledge of the factors that made the agreement unenforceable (the two directors) and failed to remedy them.

Client Takeaway for Lenders: A registered mortgage may not automatically secure a restitution claim arising from an invalid loan. If your loan document is unenforceable, do not assume the mortgage will give you a power of sale – you may need to rely on a personal judgment only.

5. No Interest on the Restitution Judgment

The Court awarded judgment for $364,275 (the advanced funds less repayments) but declined to award interest on that sum. While acknowledging this seemed unjust, the Court followed prevailing authority that the common law does not generally allow interest on restitution claims for money had and received.

Client Takeaway for Both Parties: In a restitution claim (as opposed to breach of contract), you may not recover interest on the judgment sum. This significantly affects the ultimate recovery and should be factored into any settlement negotiations or litigation strategy.

Practical Lessons for Clients

For Lenders and Financial Institutions:

1. Compliance is non-negotiable: Insist on strict compliance with s 127 of the Corporations Act. Get two director signatures (or director + secretary) for any company with two or more directors.

2. Do your due diligence: Always obtain a current company search before advancing funds. Do not rely on assumptions about who is a "real" director.

3. Don't rely on mortgages to cure execution defects: If your loan agreement is invalid, your registered mortgage may not secure the debt. You could be left with an unsecured judgment.

4. Restitution is a fallback, not a first choice: You may recover principal, but not interest, and you may lose your security.

For Borrowers (Companies):

1. Know your directors' authority: Ensure your company's internal processes for signing loans are followed. Unauthorised borrowing can still lead to personal or corporate liability via restitution.

2. Don't assume ignorance protects you: A "change of position" defence requires solid evidence of detriment and good faith. Mere assertion of inequity is not enough.

3. Ratification requires actual knowledge and action: If you discover an unauthorised loan, take immediate, clear steps to disclaim it. Continued acceptance of benefits may constitute ratification.

The Bottom Line

Parramatta Co-Operative Housing Society v Yabbyland is a cautionary tale about the high cost of non-compliance with the Corporations Act. A $430,000 loan became unenforceable because one signature was missing. While the lender recovered the principal through restitution, it lost its security (the mortgage), any entitlement to interest, and incurred substantial legal costs.

For businesses and their lawyers, the message is clear: follow the signature rules, conduct proper searches, and never assume – verify.

This summary is for informational purposes only and does not constitute legal advice. You should seek professional legal advice tailored to your specific circumstances.